Rite Aid Gains Traction Despite Losses

Drug retailer Rite Aid (NYS: RAD) has now posted losses for 19 consecutive quarters. However, it managed to narrow those losses with an increase in same-store sales and lower costs. It also made the most of a full extra week in the quarter.

Rite Aid's immunity improves
The retailer ended its fiscal year with sales up 11%. Revenue growth, according to CEO John T. Standley, was Rite Aid's "top priority for fiscal 2012." Its top line was helped by a successful flu immunization campaign and a well-implemented "wellness+" program.

Interestingly, in fiscal year 2012 the Pennsylvania-based retailer delivered close to 1.5 million flu shots -- twice the number it administered last year. Rite Aid actually performed so well that the American Pharmacists Association rewarded it with the Immunization Champion Award.

Cashing in on the Walgreen-Express impasse
Revenue was also helped by a 3% increase in same-store sales, which includes a 3.8% rise in pharmacy sales. The company also saw a 2.4% rise in prescriptions. Rite Aid managed to cash in on Walgreen (NYS: WAG) and Express Scripts' (NAS: ESRX) split, gaining new clients that could no longer fill their prescriptions with Walgreen.

Walgreen and Express fought over pricing last year, which led the retailer to terminate its contract with Express. Since the split, Walgreen has lost nearly 85% of the business it enjoyed when it was a part of the Express Scripts network.

Making healthy strides
Another area where the retailer has gained traction is in its loyalty program, wellness+. Enrollment in the program has risen to 52 million. It had 25 million active members -- those who have used their membership cards at least twice in the last 26 weeks -- at the end of the fiscal year, up 16% from a year ago. Wellness+ members proved to be vital, as they contributed 74% of Rite Aid's front-end sales, as well as 68% of overall prescriptions filled, in the last quarter.

Rite Aid has made significant progress in converting its top-performing stores into the new wellness store formats. At the end of the quarter, the retailer had 280 wellness stores. These stores have already started to make a favorable impact on front-end sales. They serve as a bridge between the pharmacy and front end of retail stores to improve the shopping experience. They also focus on wellness empowerment with greater emphasis on pharmacy services, as well as new wellness-related products.

Why the losses?
Overall, it has to be said that Rite Aid has made progress this quarter. So you must be wondering why this retailer has reported losses on so many occasions. (The company has struggled to report a single profitable quarter since mid-2007.)

Despite its growing top line, there is one thing that really worries me, at least in the short term. It has been under the burden of heavy debt since it acquired the Brooks and Eckerd chains back in August 2007. In fact, Rite Aid ended its most recent quarter with $6.3 billion in debt on its books. The problem is that it has an interest coverage ratio of 0.2, which implies that, at least in the short term, it will find it difficult to cover for its interest expenses. But we have to consider the fact that the company is still in a turnaround phase, and a current ratio of 1.8 indicates that it still has time to reverse the trend. To follow Rite Aid's turnaround, simply click here.

If you don't believe in Rite Aid's growth story, we have an emerging-market retailer that has the most upside potential we've seen in a while. We've featured it in our report, "The Motley Fool's Top Stock for 2012." You can learn more by just clicking here.

At the time thisarticle was published Fool contributor Shubh Datta doesn't own shares in the companies listed above. Motley Fool newsletter services have recommended buying shares of Express Scripts. The Motley Fool has a disclosure policy.
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